MHB announced securing EPCIC works for the Kasawari project. While no details were provided, we believe this contract is sizable at a guesstimated value of ~USD600m (or ~RM2.5b), lifting the company’s order-book by 3-4x to >RM3b (multi-year high), and providing much-needed earnings visibility. Given its huge size, we believe this contract could serve as a re-rating catalyst, and hence, we upgrade our call to OUTPERFORM with a higher TP of RM1.05.

Awarded Kasawari project. Yesterday, MHB announced that it had been awarded a contract from Petronas Carigali to undertake the engineering, procurement, construction, installation and commissioning (EPCIC) works for the Kasawari Gas Development project.

Scope of works: the EPCIC includes construction of 47k tonnes of central processing platform (CPP), 8.6k tonnes of wellhead platform (WHP) and a flare structure, together with two bridges linking the CPP to the WHP and the flare structure. The contract also involves the transportation and installation of an 85km pipeline linking the Kasawari CPP to the existing E11R-A platform.

Impact. While no further details were provided, we guesstimate the value of the contract to be worth roughly ~USD600m (or ~RM2.5b), with an EPCIC timeframe of approximately ~3-4 years. We expect the contract to fetch low-teens percentage EBIT margins, although earnings recognition will be mostly back-loaded towards the very later stages of progression, similar to the company’s other projects at hand. As such, post-contract award, we made no changes to our FY19E numbers, and +7% to our FY20E numbers, with the remaining bulk of the earnings expected to be recognised in FY21-22.

Positive on contract award. Overall, we are undoubtedly positive on this announcement, given a successful materialisation of a contract award for the project. To recap, the Kasawari EPCIC contract was previously anticipated to be awarded in the earlier part of the year, but was met with numerous delays given environmental and political issues. As such, with the contract now being successfully awarded, we believe this would provide a much-needed clearing of overhang of this current issue, providing added clarity and earnings visibility for the company. Take note that this is a sizable contract for MHB, lifting the company’s order-book by 3-4x to a multi-year high of >RM3b (from RM864m as at end-1Q19).

Upgrade to OUTPERFORM (from MARKET PERFORM previously). We raised our TP to RM1.05 (from RM0.77 previously), pegged to 0.7x PBV on FY20E – roughly in-line with its 5-year mean valuations (from previously 0.5x PBV at -0.5SD).

Given the size of the contract, we believe this Kasawari award will act as a re-rating catalyst for the stock. The company is also expected to turn around from losses in 2H19, underpinned by an improvement of dry-docking activities, partially lifted by the implementation of IMO2020. Additionally, MHB is also one of the few names within the O&G space with a net-cash balance-sheet.

Risks to our call include: (i) lower-than-expected marine activities, and (ii) higher-than-expected costs in heavy engineering.

Source: Kenanga Research - 24 Jul 2019